Community bankers are urging lawmakers to boost funding for federal program that offers a government backstop on real estate loans to family farmers.
The program, which provides up to $1.5 billion annually in loan guarantees, has become so popular among rural banks that it is out of funds for the third time in three years. With demand for the guarantees still running high, banking trade groups plan to push Congress in the coming weeks to double the size of the cap, to $3 billion.
"We're creating a real traffic jam of loans in farm country," says John Blanchfield, senior vice president at the American Bankers Association.
But the banks' lobbying efforts seem likely to draw significant opposition at a time when farm subsidies are being pared and there is bipartisan interest in reducing government support for the real-estate sector.
Some economists are also voicing concern about the possibility of a bubble in the price of farmland, which has been rising faster than its long-term average growth rate. If prices tumble, loans could sour and the government could be partially on the hook for the losses.
"Land prices have been going up very rapidly lately," says Ron Plain, an agricultural economist at the University of Missouri. "They're going up at a rate that is faster than is sustainable."
Run by the U.S. Department of Agriculture's Farm Service Agency, the Guaranteed Farm Ownership loan program dates back to the 1930s.
Under the program, family farmers can get loans of as long as 40 years to buy land or refinance existing debt. The maximum loan size is $1.3 million, and the average amount is $389,000, according to the ABA. In most cases, the federal government will guarantee up to 90% of the loan amount.
Apart from the guarantee, banks like the loans because they can be sold easily on the secondary market, while farmers benefit from longer loan terms and easier-to-obtain qualifications.
For some lenders, the program also provides an incentive to offer credit to borrowers who likely would not qualify for a loan otherwise. "I'm not saying they're deadbeats," Blanchfield says, "but I'm also saying they're not prime bank customers."
"The guarantee is really an incentive for the bank to make the loan, or make the loan on terms that are favorable to the farmer, that the bank otherwise couldn't make," adds Brian Gossling of the Farm Service Agency's Iowa office.
State Bank of Southern Utah, based in Cedar City, uses the federal program to make loans to alfalfa, grain and corn farmers in southwestern Utah, eastern Nevada and northern Arizona.
DeLynn Barton, executive vice president of agricultural lending at the $711 million-asset bank, says the program allows his bank to make 20-year, fixed rate loans. For farmland loans that don't carry the government guarantee, the bank's rates reset every one to three years.
Several of the bank's customers are currently in limbo - having been approved for government-guaranteed loans that remain unfunded. "We've got probably $3 million worth of that type of situation right at the moment," Barton says.
The situation is similar at Cleveland State Bank in Wisconsin, which uses the program to make loans to nearby dairy farmers. Under the government program, the $95 million-asset bank makes 30-year fixed rate mortgages, says assistant vice president Wendy Sellen.
"Without a guarantee, my company is not writing any loans longer than five years," she adds.
Another lender affected by the current standstill, California Coastal Rural Development Corp., relies entirely on the government guarantee to make mortgage loans to small farmers.
The nonprofit lender, in Salinas, doesn't carry as much capital as community banks do, explains Jose Guerra, a senior loan officer at California Coastal. Because the firm sells the government-backed loans onto the secondary market, it doesn't have to hold capital against them.
"We can do some non-guaranteed lending, but then that would deplete our capital," Guerra says.
Nationally, the last five years have seen a spike in demand for the government-guaranteed loans. In fiscal year 2007, participating lenders requested $965 million under the program, which was $440 million less than what was available, according to government data.
By fiscal year 2012, demand had surged to $1.75 billion. That left a gap of $252 million between the amount requested and the $1.5 billion funding cap.
Loans that were stuck in the queue on Sept. 30, 2012, got funded early in the 2013 fiscal year, but as long as demand for the loans outstrips supply, the logjam will continue to build.
Starting in fiscal year 2012, Congress raised the fee charged to borrowers to 1.5%, a change that was designed to make the program fund itself. So whereas the program got a $7.2 million appropriation in the 2011 fiscal year, that number dropped to zero last year.
That change should address concerns about the program's cost, argues Mark Scanlan, senior vice president of agriculture and rural policy at the Independent Community Bankers of America. He will be pushing Congress over the next two months to raise or eliminate the funding limit.
"This is a needless limit," Scanlan says. "The irony is that this program doesn't cost any money."
At the moment, there is no legislation to raise the program's funding limit, and the issue will likely be addressed in a large bill tied to the scheduled expiration of current government spending measures on March 27.
The bankers will be up against opponents of farm subsidies, who had some success in cutting subsidies in the farm bill that passed the Senate last year.
Daniel Sumner, director of the Agricultural Issues Center at the University of California-Davis, compares the guaranteed agricultural loans to the home mortgages bought by Fannie Mae, and not in a good way.
Though the farmland program may benefit specific lenders and growers, there's good reason to be skeptical that it serves any broad public purpose, he argues.
"It's a trillions of dollars market. There's lots of financing options," he says. "Do we really think that politicians or other agents are going to be better at evaluating these loans?"
Another challenge for bankers: there may be hesitation in Congress to expand the federal government's exposure to agricultural real estate at a time when land prices are high.
Agricultural land prices rose by 10.9% from 2011 to 2012, and by 8.6% the previous year, according to government data. That compares to a long-term average growth rate of 6%, says the University of Missouri's Plain.
The trend in farmland prices has been unsteady over the last decade; prices rose by 20.1% between 2004 and 2005, and they declined by 2.8% from 2008 to 2009, the only year since the 1980s in which prices dropped.
Plain attributes the most recent rise in prices to high prices for corn, wheat and soybeans - driven by relatively low crop yields and strong demand for corn from the biofuels industry - as well as low interest rates.
"At some point in time, interest rates are going to go higher, and that's going to make it very difficult to sustain these high land prices," Plain argues.
He estimates that nationwide agricultural land prices are roughly 20% above their historical trend. "I would say the risk if a bubble occurs would be on those loans that have less than 20% equity in them," he says.
The federal program does not establish a minimum down payment; instead, its guidelines state that government officials determine whether the collateral proposed by the lender is adequate.
Bankers say the program's losses are low, and they insist that the federal government does not face large risks.
"The guarantee is not strong enough, in and of itself, to allow banks to do a really stupid deal," Blanchfield says.